Question
Sorensen Enterprises has provided the following monthly income statement: Total Product A Product B Prodict C Sales $100,000 $50,000 $20,000 $30,000 Variable expenses 60,000 30,000
Sorensen Enterprises has provided the following monthly income statement:
Total | Product A | Product B | Prodict C | |
Sales | $100,000 | $50,000 | $20,000 | $30,000 |
Variable expenses | 60,000 | 30,000 | 10,000 | 20,000 |
Contribution margin | 40,000 | 20,000 | 10,000 | 10,000 |
Fixed expenses: | ||||
Facilities cost | 9,000 | 4,500 | 1,500 | 3,000 |
Depreciation | 6,000 | 3,000 | 1,200 | 1,800 |
Supervisors' salaries | 5,000 | 1,500 | 500 | 3,000 |
Maintenance | 3,000 | 1,500 | 600 | 900 |
Administrative expense | 10,000 | 3,000 | 2,000 | 5,000 |
Total fixed expenses | 33,000 | 13,500 | 5,800 | 13,700 |
Net operating income | 7,000 | 6,500 | 4,200 | (3,700) |
The owners are considering dropping Product C. The following additional information is available:
- If Product C is dropped, sales volume of Product B is expected to drop by 10%.
- The $3,000 facilities cost for Product C represents the cost of a seperate facility used to manufacture the product.
- The company's total depreciation would not change if Product C was dropped.
- If Product C were dropped, it would be possible to cut one of administrative staff employees. Their salary totals $2,000 per month.
- If Product C were dropped, total maintenance costs are expected to drop by $1,000 per month.
Question is: By how much would the net operating income of Sorensen increase or decrease if they drop Product C?
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